Workplace Benefits During Job Transitions and Retirement
Leaving a job, no matter what the reason, is a time of emotional turmoil and disruption. Sometimes these transitions are planned, such as getting a better job at another employer. In some cases, the transition will be unplanned, such as having your job eliminated or moved. During these transitions it’s very important to understand what the options are for your workplace benefits. Employers make some benefits portable and employees need to know what to sign up for and what to skip. You should be talking with your financial advisor during times of transition to get the advice you need on this complex topic.
Many benefits are only portable for employees if they sign up for them within a certain time period after leaving their employer. While the Human Resources department almost always know about benefits like medical insurance, they will often not even know about portability of benefits such as group life insurance or group disability. The best way to know about all of these benefits is to get a copy of the plan document. If you can easily get a copy before you leave your employment, but after you’ve left, you will probably have to ask HR for a copy.
Health Insurance and COBRA
The portability of your Health Insurance is actually mandated by a law called the Consolidated Omnibus Budget Reconciliation Act or COBRA. COBRA covers any employer with a group health plan that covers more than 20 employees, so very small employers are not covered. COBRA allows you to continue to be covered by your previous employer health care insurance plan, but does not require your employer to pay for it. Some employers will pay for it if they terminate a lot of employees at one time, but if they don’t you have to pay 102% of your employers cost for the plan. If you have no other coverage, then COBRA can be a good deal. Coverage lasts 18 months from termination for most employees and their families. You have 60 days to sign up for COBRA coverage after you leave your employer. Remember to avoid a tax penalty, you need to have continuous medical coverage for the whole year.
Retiree Health Coverage
Many large companies provide some retirement benefits to their retirees including retiree health coverage. If you retire early, this coverage becomes your primary health insurance. Once you reach age 65 and qualify for Medicare, the retiree health coverage can become Medigap (or Medicare Supplemental) policies which cover what Medicare parts A and B do not. Sometimes even prescription drug coverage is included. BUT you have to remember to sign up right away. There is often a limited time period such as 60 days to sign up and after that you are out of luck. Retiree health coverage may not be free and may be more expensive than an individual medical policy you might buy. But it is usually much better coverage.
A word about Dental and Vision Coverage
Employers often have dental and vision insurance plans. These are great perks while the company is paying, but should you pay for these policies as part of COBRA or a Retiree Health Plan? Sometimes you don’t have a choice, since your COBRA or Retiree Health Plan includes the dental or vision coverage and you can’t opt out. But if you do have a choice and you are paying yourself, you should evaluate the plan carefully. Dental coverage often has a low yearly maximum and in my experience is seldom a good deal on an individual basis. The same thing with vision coverage. Only people who need the coverage usually buy it, so it has to be expensive or the insurance company loses money.
Long Term Disability Insurance
For those of working age, Long Term Disability Insurance or LTD is the most important coverage after medical insurance. A few employer group policies will offer conversion to an individual policy and it could be a good idea to keep it temporarily until you get a new job. LTD pays you a replacement paycheck if you become disabled and can’t work for a longer time period, typically over 90 days. If you lose your coverage when you lose your job, and then become disabled when you’re unemployed, you could be in dire financial straights in a very short time.
Sign up for LTD Coverage at Your New Job Right Away!
When you get your new job, you need to sign up for LTD coverage right away to avoid medical underwriting. There is usually only a short open-enrollment period after first being hired: 30 or 60 days. After that, if you decide to take the coverage the insurance company will subject you to medical tests to make sure you qualify. Group LTD insurance is usually employee-paid and sometimes employees don’t understand why they should be pay to be covered, but it is well worth it. The costs of being unable to work because of disability are devastating and the chances of becoming disabled are usually higher than the chance of dying. According to the Social Security Administration a 20 year-old has a more than 1-in-4 chance of a disability before retirement age.
Other LTD Coverage Options
Since LTD insurance is so necessary and you usually pay for it yourself, are there any options other than employer group policies? The answer is maybe. Unlike for medical insurance, industry associations are allowed to offer their members group disability insurance. For instance I am a member of the IEEE because of my former career as an Electrical Engineer and I am a member of the FPA (Financial Planning Association) because of my current career. Both associations offer their members group LTD coverage. I was lucky to get coverage with the FPA during a rare open enrollment period, so I didn’t need medical underwriting. If you qualify for a policy like this, it is portable, since you can keep it no matter who your employer is. The cost is usually about the same as an employer policy. There are also individual LTD policies, but they tend to be quite expensive. I sell them, so if you need one, I will be happy to discuss it with you. There are also excess LTD policies which cover you at higher limits than some employer policies if you are highly compensated.
Most medium to large employers offer group life insurance as a workplace benefit. If you have debts or dependents you almost certainly need life insurance and if you were relying on your employer’s group plan and leave your job, you might be leaving your life insurance too. The good news is that individual term life insurance policies are readily available and very competitively priced. Often over a longer term, they are cheaper than the employer group policies. So just go out and buy one, but you do have to be medically underwritten. So if that medical underwriting is an issue, then you should see if your employer policy can be extended or converted into an individual policy. Many of them can, but it is often expensive compared to other term insurance options. But if you are in poor health, it can be very beneficial to convert the employer policy. Time limits are often as short as 30 days to decide and the HR department will probably have to research this because not that many people convert. So start the process as soon as possible.
If you get another job, there will probably be a certain amount of group life insurance available to you without underwriting if you sign up during the initial open enrollment. Also, some associations and even credit unions provide group term life insurance and sometimes amounts up to $250,000 might be available during an open enrollment period without medical underwriting. So if you are in poor health, this is definitely something to look into. If you are in good enough health to go through underwriting, an individual term policy is usually best (and cheapest), followed by an association group policy, and employer group last. Why is it last? Because you lose it when you lose your job!
Other Group Insurance Coverage
Employers offer accidental death and disability (AD&D) coverage. It’s a nice perk, but the truth is that the risk is quite low of being killed or permanently disabled due to an accident. I would not worry about replacing this coverage during your transition. If you decide to take a trip around the world, look into travel insurance instead. Travel Insurance includes AD&D coverage during your trip and often includes other benefits such as international medical insurance.
Sometimes employers offer you cancer or disease insurance. These policies might be portable if you ask. They are rarely a good deal unless you know through family history that you are at-risk for cancer or certain diseases.
If you were in your employer’s retirement plan, the good news is that you rarely have to make an immediate decision. You can leave your money in your former employer’s 401(k) plan, transfer the money to a new employer’s plan, or roll the funds over to an IRA. Which is better for you depends on each plan and your individual financial situation, so there is no hard and fast rule other than avoiding a taxable distribution. As long as you do a direct custodian-to-custodian transfer between plans you will not have to pay immediate taxes and can avoid penalties. This is an area where a financial advisor such as myself can help.
One surprise can be a deferred-compensation plan. These plans defer some of your income while you work for an employer. But when you leave the employer, they pay you all the deferred compensation in a lump sum. Getting all that money at one time can be very pleasant, but it will come with a nasty tax surprise. Make sure you do proper tax planning!
Get Help Before Making Mistakes
I advise my clients on workplace benefits as part of comprehensive financial planning. A job transition is one of the times when good decision making is paramount. Make sure you have the advice you need!